SA rate-hike bets held with inflation near top of target

Data from the statistics office showed the annual inflation rate fell to 5.7% in January from 5.9% a month earlier.
Image: Dwayne Senior/Bloomberg

Traders held bets that South Africa’s central bank will continue its hiking cycle next month as inflation remains close to the top of its target range.

Forward-rate agreements starting in two months, used to speculate on borrowing costs, shows traders are still fully pricing in a quarter-point increase in the repurchase rate when the monetary policy committee gives its next decision on March 24 and a 77% chance of a 50 basis-point increase.

Data from the statistics office showed the annual inflation rate fell to 5.7% in January from 5.9% a month earlier. That matched the median of 13 economists’ estimates in a Bloomberg survey.

While the South African Reserve Bank officially targets price growth in a band of 3% to 6%, its MPC prefers to anchor expectations close to the midpoint of the range. Inflation, stoked by near record-high fuel prices and rising food costs, has now breached 4.5% for nine consecutive months.

South Africa’s central bank lifted its benchmark interest by 25 basis points to 4% in January in a bid to tame rising inflation, a move that continued to unwind some of 2020’s extraordinary monetary policy stimulus that was aimed at shoring up an economy ravaged by the coronavirus pandemic. The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, now indicates a repurchase rate of 4.91% by the end of the year.

January’s inflation reading is the first that reflects changes to the weighting of the inflation basket and updated consumer price indexes.

© 2022 Bloomberg

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Inflation-targeting is so last-century!

The economic theory behind increasing interest rates in order to tame inflation is debunked when a big chunk of the price increases is beyond-control issues like oil price and the current supply chain problems. We can hike the repo to 20%, it won’t make a difference to inflation. It will only serve to kill more potential job-creating investments or expansions due to the increase in the expected IRR of projects off the higher risk-free rate.

Find me a free economy with full employment, decent GDP growth and high interest rates?

End of comments.

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